PART 1: NEGOTIABLE INSTRUMENTS – INTRODUCTION

In this age where electronic commerce and paperless transactions are commonplace, it would not be easy for some to
visualize the application of many of the provisions of the Negotiable Instruments Law.

The NIL remains unchanged for more than a century. Its provisions are undisturbed and continue to govern instruments
that are designed to be “couriers without luggage.”

CHAPTER 1: GENERAL CONSIDERATIONS

I. GOVERNING LAW

The law that governs in this jurisdiction is Act No. 2031, otherwise known as the NIL.

Before the NIL was enacted, negotiable instruments were governed by Articles 439-596 of the Code of
Commerce. However, these provisions were impliedly repealed by the provisions of the NIL.

Since Sec. 197 results only in implied repeal of inconsistent acts and laws, there are provisions of the Code of
Commerce that are still in force because there are provisions that are not inconsistent with the NIL. For
instance, the Code of Commerce provisions on crossed checks are still in force because there is no provision in
the NIL that deals with crossed checks.

A. APPLICABILITY OF THE NIL

The provisions of the NIL are not applicable if the instrument involved is not negotiable. There must be
aa document in existence of the character described in Section 1 of that law.

If at all, the NIL can be applied only by analogy.

II. HISTORY OF THE NIL

The provisions of the NIL were copied from the American Uniform Negotiable Law. In turn, the latter law was
based largely on the Bills of Exchange Act of 1882. Hence, decisions of the courts in the US and in England based
on the American Uniform Negotiable Law and the Bills of Exchange Act of 1882 can be applied in this
jurisdiction.

The NIL also permits resort to the provisions of the Bill of Exchange Act of 1882 on matters where the NIL
provisions are deficient. For instance, the NIL does not contain provision on crossed checks, only the Code of
Commercee includes provisions thereon. Hence, other matters not covered by the Code of Commerce on
crossed checks can be resolved using the Bill of Exchange Act of 1882.

The provisions of the Bill of Exchange Act of 1882 that were not made part of the NIL can still be applied in this
jurisdiction because the former and the American Uniform Negotiable Instruments Law embody rules that are
founded upon the Lex Mercatoria, the Law Merchant, that developed out of international trade. Law Merchant
embraces the usages of merchants in different commercial countries.

III. FUNCTIONS OF NEGOTIABLE INSTRUMENTS

Two main functions –

1. They serve as substitute for money

2. They serve as credit instruments

However, they can also be considered proof of the existence of a transaction because they may state the
transaction that gave rise to the issuance of the instrument.
In particular, the functions of a negotiable instrument may be enumerated as follows –

1. It is a substitute for money

2. It is a medium of exchange
3. It is a credit instrument which increases credit transaction
4. It increases purchasing power in circulation
5. It is proof of transactions

Negotiable instruments are not mere contracts but are substitutes for money. It is a medium of exchange, it is a
tool that is used in commercial transactions.

A. NOT LEGAL TENDER

Negotiable instruments are not legal tender. Only notes and coins issued by the BSP are considered legal
tender.

a) Coins as Legal Tender

MAXIMUM AMOUNT DENOMINATIONS

P1,000.00 1 peso
5 pesos
10 pesos
P100.00 1 centavo
5 centavos
10 centavos

b) Checks Not Legal Tender

Section 60 of the New Central Bank Act is categorical with respect to checks – they are declared
to be not legal tender and creditors cannot be compelled to accept checks in payment of
obligations.

Delivery of negotiable instruments does not produce the effect of payment. Even if delivery of
the check is accepted by the creditors, obligations are deemed paid only when the instruments
are encashed. The rule covers manager’s checks, cashier’s checks or certified checks.

Since a negotiable instrument, like a check, is only a substitute for money and not money,
delivery of such instrument does not, by itself, operate as payment.

However, applying Section 60 of the New Central Bank Act, the obligation to the creditor is
deemed paid if the check has been cleared and credited to his account. This implies that the
creditor deposited the check to his account and the same was honored or cleared byt he drawee
bank upon presentment.

c) Exceptions

Where the check is impaired due to the fault of the creditor – in these cases, the obligation is
deemed paid even if the check is not encashed.

While delivery of checks may not be considered payment, delivery of checks may be sufficient in
the exercise of certain rights and privileges. The right of redemption is a privilege and is not an
ordinary obligation.
IV. FEATURES OF NEGOTIABLE INSTRUMENTS

A. NEGOTIABILITY

The characteristic of negotiability allows negotiable instruments to be transferred from one person to
another so as to constitute the transferee a holder. This characteristic gives it freedom to circulate as a
substitute for money.

B. ACCUMULATION OF SECONDARY CONTRACTS

When negotiable instruments are transferred through negotiation, secondary contracts are
accumulated because the indorsers become secondarily liable not only to their immediate transferees
but also to any holder. Unless they have valid defenses against the holder or any party, these indorsers
are liable to said holder or whoever may be compelled to pay the instruments.

There is therefore greater “security” because whoever takes the instrument has greater chances of
recovery because more people are liable under the instrument.

If there is greater probability of payment, people are more likely to accept negotiable instruments as
tools in credit transactions.

In checks, the drawer, by drawing the instrument, not only enters into a secondary contract to pay the
holder but also represents that there are sufficient funds in the bank to cover the check that he issued.

V. KINDS OF NEGOTIABLE INSTRUMENTS

Two basic types of negotiable instruments –

a) Bill of Exchange – an unconditional order in writing addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay on demand or at
fixed or determinable future time a sum of certain in money or to bearer.
b) Bill of Exchange – an unconditional promise in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum of
certain in money or to order or to bearer. Where a note is drawn to the maker’s own order, it is
not complete until indorsed by him.

The instrument specified herein are not always negotiable. Although they may be or are usually negotiable, the
test is still the presence of the requisites of negotiability on the face of the instrument.

A. BILLS OF EXCHANGE

In other jurisdiction, a bill of exchange is commonly called a draft. The American Institute of Banking
defines draft as a “signed order by one party, the drawer, addressed to another, the drawee, directing
the drawee to pay a specified sum of money to the order of a third person, the payee.”

A bill of exchange may be an INLAND BILL or a FOREIGN BILL.

An inland bill is a bill which is, or on its face purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder
may treat it as an inland bill. It is important to determine if the bill is a foreign bill or an inland bill
because there are provisions of the NIL that apply to foreign bills.

A bill of exchange or draft may be a –

• TIME DRAFT – one that is payable at a fixed rate

• SIGHT or DEMAND DRAFT – one that is payable when the holder presents it for payment.
 A bill may also be a TRADE ACCEPTAMCE which is used in contracts of sale. In this type of bill, the seller
or drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee).

If the seller does not trust the credit of the buyer or is not familiar with him, the seller may wish to
require the bank of the buyer to accept the bill or draft. In which case, the bill is called BANKER’S
ACCEPTANCE.

The most common form of bill of exchange is a CHECK which is defined as a bill of exchange drawn on a
bank payable on demand.

Other bills of exchange –

1. Clean Bill of Exchange – no document is attached when presentment for payment or

acceptance is made.
2. Documentary Bill of Exchange – a document/s is/are attached when present for payment or
acceptance.
B. PROMISSORY NOTES

A certificate of deposit is a form of promissory note which is a written acknowledgement of a bank of its
receipt of a certain sum with a promise to pay the same. It is defined as a written acknowledgement by
a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay
to the depositor, to the order of the depositor, or to some other person or his order, whereby the
relation of the debtor and creditor between the bank and the depositor is created.

Bonds may also partake the nature of negotiable promissory notes. A bond is defined as a certificate or
evidence of a debt on which the issuing company or governmental body promises to pay the
bondholders a specified amount of interest for a specified length of time, ant to repay the loan on the
expiration date.

Debenture is a promissory note or bond backed by the general credit of a corporation and usually not
secured by a mortgage or lien on any specific property.

Bank notes are promissory notes of the issuing bank which are payable to bearer on demand.

a) Kinds of Bonds
1. Bottomry bonds – bonds secured by mortgage of ships
2. Chattel mortgage bonds – bonds secured by mortgage on chattels of businesses.
3. Collateral trust bonds – bonds secured by collateral deposited with a trustee.
4. Convertible bonds – bonds that can, at the option of the holder, be converted into
stocks.
5. Coupon bonds – bonds with interest coupons attached.
6. Guaranteed bond – a bond which has interest or principal or both guaranteed by a
company other than the issuer.
7. Income bond – bond on which interest is payable only when earned after payment of
interest upon prior mortgages.
8. Joint and several bond - a bond the principal and interest of which is guaranteed by two
or more persons.
9. Joint bond – bond secured by two or more obligors who must be joined in any action on
such bond.
10. Mortgage bond – bond secured by a mortgage on a property.
 C. BILLS TREATED AS NOTES

A bill may be treated as a promissory note when –

1. the drawer and the drawee are the same person

2. the drawee is a fictitious person
3. the drawee has no capacity to contract

An instrument may be treated either as a bill or a note at the election of the holder when the
instrument is so ambiguous that there is doubt whether it is a bill or a note/

D. BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTE BILL OF EXCHANGE

1. Contains an unconditional promise 1. Contains an unconditional order.
2. Two parties on its face 2. Three parties on its face.
3. Person who signs it is the maker 3. Person who signs it is the drawer.
4. Person who signs it, the maker, is primarily 4. Person who signs it, the drawer, is secondarily
liable liable.
5. The person primarily liable is the maker 5. Person primarily liable os the drawee-acceptor.
6. There is only one presentment: for payment 6. There are 2 presentments: a) for acceptance;
and b) for payment.

VI. PARTIES TO NEGOTIABLE INSTRUMENTS

The original parties in a promissory note are the maker and the payee.

The maker is the person who promises to pay according to the tenor of the note while the payee is the person
who is to receive payment from the marker.

On the other hand, the parties who appear on the face of a bill of exchange are the drawer, drawee and the
payee. The drawer is he person who draws the bill and orders the drawee to pay the payee a sum certain in
money. The drawee is the one being commanded to pay the instrument. However, in reality, the drawee is not a
party unless he accepts the bill. If he accepts, the drawee, now called the acceptor, assents to the order made by
the drawer.

Other persons who may become parties after the issuance of the instrument are the indorsers and the holders.
Indorsers are persons who transfer or negotiate an instrument by indorsement completed by delivery. Holder
means the payee of indorsee of a bill or note who is in possession of it or the bearer thereof. A bearer means
the person in possession of a bill or note which is payable to the bearer.

In bills of exchange, a referee in case of need may be designated by the parties. The drawer of a bill and any
indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say,
in case the bill is dishonored by non-acceptance or non-payment.

VII. DISTINGUISHED FROM NON-NEGOTIABLE INSTRUMENTS

Validity is an issue independent of the issue of negotiability. The contract represented by or out of which the
negotiable instrument arose may be invalid, voidable or rescissible or unenforceable but the instrument may
remain negotiable.
 In the same manner, a non-negotiable instrument may represent a valid obligation. it may be an instrument that
represents a personal property, an obligation or action for a demandable sum. Such negotiable instrument may
be freely transferred.

However, it is equally clear that the basic disadvantage of a non-negotiable instrument from a negotiable
instrument is that there can be no holder in due course in a non-negotiable instrument. Hence, the transferee of
a non-negotiable instrument is not free from personal defense. In a non-negotiable instrument, the title
acquired by the transferee is “derivative title.” If the title of the transferor is defective (and therefore subject to
defenses), the title of the transferee will also be defective. In a negotiable instrument, the transferee may
acquire more rights. A holder in due course will not merely get a derivative title because he will get a “clean
title,” one that is free from infirmities in the instrument and defects of title of prior transferors.

In negotiable instruments, the solvency of the debtor is in a sense guaranteed by the indorsers because they
engage that the instrument will be accepted, paid or both and that they will pay if the instrument is dishonored.

Distinction summarized as follows –

1. Only negotiable instruments are governed by the NIL. If an instrument is not negotiable, the NOL does
not apply. Application of the NIL to non-negotiable instruments is only by analogy.
2. Negotiable instruments can be transferred by negotiation or by assignment. Non-negotiable instruments
can be transferred only by assignment.
3. The transferee of a non-negotiable instrument can never be a holder in due course but remains to be an
assignee. A transferee of a negotiable instrument can be a holder in due course if all the requirements
under Section 52 of the NIL are complied with.
4. Since the transferee of a non-negotiable instrument can not be a holder in due course, all defenses
available to prior parties may be raised against the last transferee.

VIII. INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT

1. Preparation and signing complete with all the requisites provided for in Section 1 of the NIL.
2. Issuance – first delivery of the instrument to the payee (from maker to payee/bearer or from the drawer to the
payee/bearer).
3. Negotiation – transfer from one person to another so as to constitute the transferee aa holder.
4. Presentment for acceptance for certain kinds of Bills of Exchange – the bill of exchange shall be presented to
the drawee so that the latter will signify his agreement to the order of the drawer to pay.
5. Acceptance – written assent of the drawee to the order.
6. Dishonor by non-acceptance – refusal to accept by the drawee.
7. Presentment for payment – the instrument is shown to the maker or drawee/acceptor so that the said maker or
drawee/acceptor will pay.
8. Dishonor by non-payment – refusal to pay the maker or drawee/acceptor.
9. Notice of Dishonor – notice to the persons secondarily liable that the maker or the draqwee/acceptor refused to
pay or to accept the instrument.
10. Protest (in some cases)
11. Discharge.